Freddie Mac 2010 Annual Report Download - page 200

down Freddie Mac and Fannie Mae, stating that the Obama Administration will work with FHFA to determine the best way
to responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The
report states that these efforts must be undertaken at a deliberate pace, which takes into account the impact that these
changes will have on borrowers and the housing market.
The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient capital
to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations, and further
states that the Obama Administration will not pursue policies or reforms in a way that would impair the ability of Freddie
Mac and Fannie Mae to honor their obligations. The report states the Obama Administration’s belief that under the
companies’ senior preferred stock purchase agreements with Treasury, there is sufficient funding to ensure the orderly and
deliberate wind down of Freddie Mac and Fannie Mae, as described in the Administration’s plan.
The report identifies a number of policy levers that could be used to wind down Freddie Mac and Fannie Mae, shrink
the government’s footprint in housing finance, and help bring private capital back to the mortgage market, including
increasing guarantee fees, phasing in a 10% down payment requirement, reducing conforming loan limits, and winding down
Freddie Mac and Fannie Mae’s investment portfolios, consistent with the senior preferred stock purchase agreements.
These recommendations, if implemented, would have a material impact on our business volumes, market share, results
of operations and financial condition. We cannot predict the extent to which these recommendations will be implemented or
when any actions to implement them may be taken. However, we are not aware of any current plans of our Conservator to
significantly change our business model or capital structure in the near-term.
Management is continuing its efforts to identify and evaluate actions that could be taken to reduce the significant
uncertainties surrounding our business, as well as the level of future draws under the Purchase Agreement; however, our
ability to pursue such actions may be limited by market conditions and other factors. Our future draws are dictated by the
terms of the Purchase Agreement. Any actions we take will likely require approval by FHFA and Treasury before they are
implemented. FHFA will regulate any actions we take related to the uncertainties surrounding our business. In addition,
FHFA, Treasury, or Congress may have a different perspective from management and may direct us to focus our efforts on
supporting the mortgage markets in ways that make it more difficult for us to implement any such actions.
Purchase Agreement
Overview
The Conservator, acting on our behalf, entered into the Purchase Agreement on September 7, 2008. The Purchase
Agreement was subsequently amended and restated on September 26, 2008, and further amended on May 6, 2009 and
December 24, 2009. Under the December 2009 amendment to the Purchase Agreement, the $200 billion maximum amount
of the commitment from Treasury will increase as necessary to accommodate any cumulative reduction in our net worth
during 2010, 2011 and 2012. If we do not have a capital surplus (i.e., positive net worth) at the end of 2012, then the amount
of funding available after 2012 will be $149.3 billion ($200 billion funding commitment reduced by cumulative draws for net
worth deficits through December 31, 2009). In the event we have a capital surplus at the end of 2012, then the amount of
funding available after 2012 will depend on the size of that surplus relative to cumulative draws needed for deficits during
2010 to 2012, as follows:
• If the year-end 2012 surplus is lower than the cumulative draws needed for 2010 to 2012, then the amount of
available funding is $149.3 billion less the surplus.
• If the year-end 2012 surplus exceeds the cumulative draws for 2010 to 2012, then the amount of available funding is
$149.3 billion less the amount of those draws.
The Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to us after any quarter
in which we have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our GAAP balance
sheet). In addition, the Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to us if
the Conservator determines, at any time, that it will be mandated by law to appoint a receiver for us unless we receive these
funds from Treasury. In exchange for Treasury’s funding commitment, we issued to Treasury, as an aggregate initial
commitment fee: (a) one million shares of Variable Liquidation Preference Senior Preferred Stock (with an initial liquidation
preference of $1 billion), which we refer to as the senior preferred stock; and (b) a warrant to purchase, for a nominal price,
shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully
diluted basis at the time the warrant is exercised, which we refer to as the warrant. We received no other consideration from
Treasury for issuing the senior preferred stock or the warrant.
Under the terms of the Purchase Agreement, Treasury is entitled to a dividend of 10% per year, paid on a quarterly
basis (which increases to 12% per year if not paid timely and in cash) on the aggregate liquidation preference of the senior
preferred stock, consisting of the initial liquidation preference of $1 billion plus funds we receive from Treasury and any
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